MFH Development and Affordable Unit Production In Cville

A concern advanced by critics of the Housing Chapter of the proposed CP is that upzoning will not generate affordable housing. Our research shows that the marginal cost of multifamily housing unit production is fairly high relative to market prices of such housing units in most jurisdictions, which tends to tilt production that does happen toward the luxury segment. One way a city might try to cope with this dynamic is to use its zoning authority to extract concessions — promises of affordable housing units — from developers in exchange for granting them permission to build their desired projects. The success of such a strategy depends on both the excess returns available to development (greater excess returns mean more of a surplus for the city to try to extract in concessions) and the skill of the city at negotiating concessions and holding developers to them.

We did a high-level analysis of the available data for Charlottesville to consider these two aspects of the nexus between upzoning and the production of affordable units. First, we catalogued all large (>5 units) MFH housing projects that we could identify in the city’s permits database since 2009. For each of these projects we checked the city’s assessments database to find their assessed value in 2020. We realize that assessed value and market value sometimes do not align. Therefore, we spot-checked a sample of assessments and compared them to sales and Zillow estimates. We found a relatively good correspondence. We compared rents (multiplied by cap rates) available on rental websites to assessments for rental buildings, and again the correspondence was generally reasonable. We then compared this sample of MFH units to pre-existing units, to see if there was a “skew” to the mix of newly produced units. Were they in fact more expensive or more affordable than the pre-existing mix of Charlottesville MFH units?

We then considered the second question. How well does Charlottesville use its current zoning power to extract concessions? The new Land Use Map will take away the power of the Special Use Permit process in many cases, so it seems likely that going forward, the power to extract concessions might be even less than it is today. On the other hand, state law has until recently imposed some limitations on what the city can ask for, so the city may have freedom to increase its “ask.”. Since the change of the state law, though, we have not seen a material difference in the aggressiveness of the city’s “ask” on projects before the Planning Commission. Surprisingly, the city does not track in one place the level of in-kind commitments of affordable units or how many units stayed affordable. That said, many developers choose to make a cash payment-in-lieu of the affordable unit contribution (the payment goes to the city’s Affordable Housing Fund), and Cvillepedia tracked these numbers for most of the biggest projects in the last decade. We looked at each of these projects and compared the payment to the current assessment.

The results were, in the first case, dispiriting, and in the second case, frankly shocking.

Mix of MFH Production

MFH units produced since 2009 have sharply higher valuations than the typical Charlottesville MFH unit. Assessment per unit was 50% higher than assessments for the other units. It was also about 50% higher than the ZHVI index for market price of MFH units in the city. Only 10% of units were in projects with a mean assessment per unit of less than $200K. And these numbers were biased down by the presence of a handful of non-market developments (for example, the Crossings supportive housing development). When those were taken out, the numbers look even worse. The assessment gap was an astonishing 65%. Only 4% of units were in projects that had a mean unit assessment of under $200K. The typical unit was at the 85th percentile of Charlottesville MFH assessments.

Affordable Housing Contributions

The large premium of newer MFH construction over older, and its generally low level of affordability was not a huge surprise. The marginal cost of construction is high and developers don’t build if they forecast that the market price for their project will be below marginal cost. This is precisely why we advocate for a plan that focuses more on the direct production of affordable units rather than relying on upzoning and market production. But the city’s performance at extracting contributions for affordable housing is beyond surprising — it is, rather, almost disgraceful. The total contributions we could find for our sample of MFH developments that opted to make payments-in-lieu (and we are going by Cvillepedia’s numbers, but we are told they got them from NDS at the time of approval — there seems to be no tracking by the city itself on an ongoing basis) beggar belief. For over 900 units of development with an aggregate assessed value of over $300mm, the city managed to get contributions to CAHF of $1.9mm. This is barely enough money to subsidize 30-40 apartments on a long-term basis from market rate to low-income affordable. It is less than 1% of the assessed value of the projects today. These numbers leave us deeply concerned about the likely effectiveness of an affordable housing strategy that depends on granting leeway to for-profit developers and relying on the city to extract affordability contributions. They have tried it before and have failed to an extent that is hard to exaggerate.

A final note. The city does not have a recent inventory of Supported Affordable Units. There is no annual report or other public document that we could find for the Charlottesville Affordable Housing Fund that covers anything later than the FY2017-2018 fiscal year. This is who is asking you to “trust them” to make for-profit development the engine of affordability. Sobering.

The combination of these two results raises questions about whether up-zoning will produce much affordable housing, either directly or by concession. Either the high prices of new build are a result of high marginal production costs and the low AHF contributions are a result of the low surplus available for extraction; or there is a large surplus, but the city is unable to extract it. Possibly we have both high costs and poor city negotiation performance! But either way, it does not support the assertion that more of the same multifamily development we have seen in the city is likely to be a powerful force for the creation of affordable units.